The market continues to adjust to a number of significant changes to the EB-5 Immigrant Investor Program in the months since new regulations were introduced. Industry stakeholders must now understand and accept these changes to continue serving EB-5 investors that stand ready to inject billions of dollars and hundreds of thousands of jobs into the U.S. economy annually.
WHAT DO REGULATIONS MEAN FOR EB-5 INVESTORS CONSIDERING URBAN PROJECTS?
From an objective standpoint, the new regulations will significantly reshape the landscape and areas that have traditionally received EB-5 capital due to the major change in the definition of a Targeted Employment Area (TEA). Under the regulations, urban projects are no longer able to assemble, or gerrymander, large numbers of census tracts to justify a TEA, which were previously approved on a state level. Now, urban projects must qualify under the federal regulatory definition, which outlines that the individual projects must qualify by just using individual census tracts where the project is located, or those directly adjacent to them. In addition, urban TEAs need to be approved or re-adjudicated by USCIS, even if they had prior exemplar approval.
Moving forward, EB-5 investors will have a much more limited selection of projects that qualify for EB-5 financing. This doesn’t only impact future projects, but as stated above, the overwhelming majority of exemplar approved projects prior to Nov. 21, 2019 will lose their TEA status. Additionally, the change of TEA designation power from the individual state to the federal level provides another significant uncertainty risk, as we have no idea how long USCIS will take to re-adjudicate, or approve, new TEAs. Put simply, given the uncertainty that defines USCIS, in investors’ minds there is simply no certainty that urban projects are going to recapture TEA status, even if they have an economist’s letter to support them.
HOW DO REGULATIONS IMPACT RURAL TEAs?
The only exception for EB-5 investors that want TEA certainty without having to wait on USCIS are rural projects - as they “automatically” qualify under the regulations. Regulations define projects that automatically qualify as a TEA as located in a city with a population of less than 20,000 people, and also located outside of a Metropolitan Statistical Area. Both these requirements must be fulfilled to have TEA approval without USCIS involvement.
WHAT ABOUT PROPOSED LEGISLATION?
An additional significant risk to urban TEA status is legislative changes. Each legislative bill proposal during the past 2 years has stated that TEA status will be defined as rural and Opportunity Zone (OZ) projects. Due to this uncertainty, until legislation, rural offerings are the best practice moving forward in providing TEA certainty to investors.
HOW DO PRICE INCREASES IMPACT THE INDUSTRY?
The price difference between TEA qualified projects for $900,000 and non-TEA projects for $1.8 million is significant, and correspondingly will reduce the total number of investors worldwide. Further, the total number of investors the industry can quantify will likely not stabilize until 2021, as the majority of investors who planned to do EB-5 by early 2020 fast tracked their EB-5 submittal to capture the $500,000 price point prior to the regulatory changes. It is expected that the number of EB-5 investors will be less than half of the 2019 numbers for the foreseeable future until backlogs and waiting times are reduced in retrogressed countries like China, India and Vietnam. Sourcing investors will become more difficult and take more expense/effort with multiple retrogressed countries and a higher price point.
A legislative bill could drastically change all of these predictions, as the number of investors after legislation could increase significantly depending on the final terms in the bill.
WHAT ARE THE IMPACTS OF RETROGRESSION?
The industry became addicted to the massive influx of Chinese EB-5 capital prior to retrogression. This allowed many inexperienced issuers, developers and networks to enter the EB-5 market, and in some cases resulted in fraud and failed projects. Given that the Chinese market is now 16.2 years in retrogression, according to Charlie Oppenheim, Chief of the Visa Control and Reporting Division, and effectively shut down, a “rest-of-world” sales strategy has to be employed to successfully source EB-5 capital. This results in two developments that have changed the industry:
The first one is that there has been a dramatic reduction in EB-5 participants that can successfully raise EB-5 capital, which has resulted in fewer companies doing business. Competition and costs to source investors has also dramatically increased since 2018.
The result of these changes is increased standards and fiduciary oversight, which have dramatically improved project quality and investor protection across the industry.
WHAT’S THE FUTURE FOR RETROGRESSED COUNTRIES?
Barring a legislative bill, regulations will increase the difficulty of procuring investors in retrogressed countries. Here is a synopsis of the current retrogressed countries:
India is not dead yet. It is not predicted that 2020 will be a great year in India for EB-5, but Oppenheim’s 2019 announcement that the reduction in the backlog from 8.4 to 6.7 years changed the outlook to be more positive. This reduction was easily predicted as we see around 1.8 family members per petition in India, which did not seem to be accurately depicted in previous backlog predictions. A slow 2020 will likely allow this to continue to decrease the Indian backlog, which will lead to a continuous revamp in Indian EB-5 investment in the future.
India has also seen a rapid advancement of its current EB-5 priority date on “Chart A: Final Action Dates for Employment-Based Preference Cases” of the visa bulletin. Once an investor received I-526 approval, the priority date on the visa bulletin represents the date an investor must have filed prior to be able to continue to the NVC DS-260 consular processing and obtain a green card. When Indian retrogression began in July of 2019 the priority date for Indian applicants was May 1, 2017 on the July visa bulletin. This date has rapidly progressed, the April 2020 visa bulletin shows that India’s priority date is now Jan. 19, 2019. This will continue to spur Indian investment even further.
The final factor aiding the Indian EB-5 market is the “Chart B, Dates for Filing of Employment-Based Visa Applications” section of the visa bulletin. This chart shows the priority dates for investors with an approved I-526 petition residing with legal status in the U.S. This chart has remained current for India, meaning that Indians who are residing in the U.S. and eligible for I-485 change of status may do so without delay. These investors will not receive a green card until their priority dates on Chart A is current, but they can receive an EAD work authorization and travel authorization within months of filing their I-485. All of these factors prove that the Indian market is more alive than anyone could have predicted in 2019.
Vietnam will prove to be an unpredictable market for the foreseeable future. The backlog is predicted to be approximately 7.1 years by Oppenheim. An average petition from Vietnam includes nearly four family members in Vietnam, higher than the industry average of approximately three family members. In addition, Vietnamese investors have traditionally not had the financial capacity of Indian and Chinese investors, which adds increased difficulty sourcing the funds. On the other hand, the current priority date on the April 2020 visa bulletin is Feb 8, 2017, and there has been a steep drop in Vietnamese petitions since Nov. 21, 2019. This slow-down of investors indicates that the backlog will likely lessen in the near future, and if we continue to see a progressing priority date Vietnam could remain a smaller, yet stable market.
China remains an unknown, and the nation has been in a standstill since the COVID-19 outbreak. As China’s backlog remains over 15 years, it is difficult to see a steady increase in industry numbers moving forward in this market. However, many Chinese agents are stating that the regulations have spurred interest in China, saying that a change triggered many investors who have claimed for the past few years that they won’t invest until the government actually makes a permanent change. Also, the swift advancement of the Chinese priority date to May 15, 2015 has investors questioning the true length of the Chinese backlog. It will be interesting to see how all of these recent events impact the 2020 Chinese market. Regardless, China will take a special type of project and redeployment platform for continued success.
Investors and issuers must all face this new world of EB-5 in 2020. TEA and price changes coupled with retrogression will continue to place a burden on raising EB-5 capital. The industry will probably continue to see a reduction in the number of EB-5 professionals and projects seeking EB-5 capital moving forward.